Rio to gain $19bn Chinese cash injection

By Sundeep Tucker in Hong Kong
Published: February 11 2009 16:14 | Last updated: February 12 2009 08:41
Rio Tinto, the troubled mining group, on Thursday unveiled controversial plans to receive a $19.5bn cash injection from Chinalco and reported a 50 per cent fall in full-year profit after taking a one-off charge for writing down the value of its aluminium assets. The planned deal, which involves the sale of minority stakes in some of Rio’s best mining assets and the issue of convertible bonds, marks the biggest ever investment by China in a foreign company.
However, the deal is expected to face close scrutiny from investors and regulators around the world.
Within minutes of the announcement, the Australian government moved swiftly to tighten its own foreign ownership laws. Wayne Swan, federal treasurer, said that the government would treat convertible debt as if it were equity, with the change effective immediately.
Leading investors in Rio, some of which has been critical of the talks with Chinalco, will also closely scrutinise the details of Thursday’s announcement for signs that the terms overly favour the Chinese side at the expense of existing shareholders.
In a statement to the Australian stock exchange, Rio said that annual net income fell to $3.7bn from $7.3bn in 2007. Underlying earnings were $10.3bn, a rise of 38 per cent on 2007, and the full-year dividend is held at $1.36. Cash flow from operations was up 64 per cent, to a record $20.7bn.
Rio said it had reduced net debt by $6.5bn to $38.7bn at the end of last year. The company’s need to pay down debts has driven the partnership with the Chinese state-owned company.
Chinalco will buy $7.2bn in convertible bonds, which will convert into Rio shares at a later date. That would increase its stake in Rio from 9 per cent to 18 per cent. The rest of the capital injection comes from the sale of minority stakes.
The bond sale is split into two tranches and will be priced to convert at $45 and $60 a share. The bonds will pay a coupon of 9 per cent and 9.5 per cent, and mature in seven years.
Rio’s London-listed shares gained 83p or 4.2 per cent to £20.52.
Chinalco will also invest $12.3bn in three strategic partnerships with Rio across its copper, aluminium and iron ore divisions.
This will include Chinalco taking minority stakes in a total of nine assets including the Escondida copper mine in Chile, the Weipa bauxite mine in Queensland and the Hamersley iron ore mine in Western Australia.
The Chinese group will also set up a $1bn joint venture to develop other projects with Rio, with each committing $500m.
Chinalco will be entitled to nominate two new non-executive directors to the 15-person Rio board, although one of the positions will be deemed to be ‘independent’.
Paul Skinner, Rio chairman, said: “[The Chinalco partnership] will create significant additional flexibility in managing the group’s debt position and strengthen its [Rio’s] competitive position in developing value creating growth options.”
Xiao Yaqing, Chinalco president, said: “The partnership with Rio Tinto... allows Chinalco a significant role in a strong industry... and direct economic exposure to Rio Tinto’s leading aluminium, copper and iron ore assets.”
The deal comes less than a week after Jim Leng abruptly quit as chairman-designate of Rio following a disagreement with Tom Albanese, chief executive, over a deal with Chinalco.
Mr Leng favoured a large rights issue as the solution to Rio’s debt problems.
Several large UK shareholders are furious over a lack of consultation on the deal after they had earlier offered to inject fresh equity.
“I am absolutely flabbergasted. It is unacceptable at every level,” said one. Another leading investor said: “We told Jim Leng it is better to raise money from us rather than selling the crown jewels.”
Rio will have to seek regulatory approval from the governments affected by the deal, which include Australia and Chile.
Rio is also likely to face some opposition from Australian politicians worried that some of the country’s best mineral assets are being sold to foreign interests, and from rival miner BHP Billiton, which owns a majority stake in the Escondida copper mine and would like to buy Rio’s 30 per cent stake itself.
Rio is being advised by Morgan Stanley and Credit Suisse. Chinalco is being advised by Nomura, JPMorgan and Blackstone and CICC.
Additional reporting by Lina Saigol, Rebecca Bream and Kate Burgess in London
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